Leverage in the hedge fund industry has declined in the last 12 months, according the lastest report on the subject from Hedge Fund Research.

HFR says average standard leverage decreased across all hedge fund strategies from 1.27 to 1.10 times investment capital, while average margin to equity also declined, falling from 17.13% to 16.98% year on year. Moreover, approximately one-third of all funds used no leverage—an increase of 4% over 2010, while over half of all funds use leverage of between one and two times their investment capital.

Larger funds tend to employ more leverage, thus HFR’s report shows 23% of funds with AUM over $1 billion use leverage of between two and five times their investment capital.

The study also points out that although funds employing leverage usually experience greater volatility, the difference in performance between leveraged and non-leveraged funds since 2005 is not statistically significant.

“The hedge fund industry reached a new record level of capital in 1Q11 by offering investors performance driven by prudent use of leverage, transparency and inflation protection over the long term,” said Kenneth Heinz, president of HFR. “The industry has evolved to suit the requirements of sophisticated investors as an integral component of their portfolio allocations as they position for growth and global inflation in 2011 and years to come.”

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